Again JT, I always love the depth and scope of your analysis. As I said in my first post, I don’t find the HAL buyout thesis improbable, but also want to rush to seeing this as the only conclusion. However, I do want to clear up a few things to perhaps determine if these puzzle pieces really do fit into place, or if you’re shaving a little bit of the side so you can force it into place.
1) The Halliburton connection. You’re totally right on Baker-Hughes and others as being bigger than HAL. But as I look at it, there is only one person (Dominique) who I’d call a Halliburton person, and one person working at one company doesn’t seem like a coincidence nor a hidden truth; it just seems like any normal event which happens day in and day out. You say there are three (Dominique, Bigger, and Dickson). While STWA might be on HAL’s radar because of some connection with Bigger (plausible), Dickson worked at Kinder-Morgan for 26 years. Just because he might have some connections with HAL makes him being a “HAL guy” a stretch. This leaves us in a position where STWA has one direct connection with HAL, and one friendly connection. This is nothing to scoff at, but it doesn’t cascade as cleanly as your arguments provide.
2) China and Temple. Seriously, this is your best argument. I think you misread my original post – I thought the official explanation for Temple made some sense (company moving from R&D to commercialization, good time to revisit the payment structure). China just went silent. The HAL thesis makes a TON of sense to explain China. I’ll admit that I don’t have a better answer, but that doesn’t mean they aren’t out there (e.g. lack of distribution channels for Asia = better to focus on North America first; China not wanting to pay enough; IPR difficulties between STWA and China).
But for Temple, I think the way you frame the relationship highlights why Dominique is important. STWA holds exclusive worldwide rights to Temple’s patents, but because they themselves don’t own the patents they are ostensibly in a position where the legal rights to use them could be stripped away from them. Granted I don’t think that this is a likely scenario, but if all of my eggs were in a single basket and there was a non-zero-percent risk that it might be illegal for me to use those eggs, I’d want a skilled patent attorney in my pocket to make sure that the recently renegotiated agreement ensures that I am totally protected. Last word on Dominique. If it’s true that he marks an important connection between STWA and HAL, why would that intermediary be a patent attorney, especially since STWA has no patents of their own and that wouldn’t be a point of contention in an M&A? I’m also curious about what major oil M&A’s Jones Walker has negotiated that shows your confidence that the HAL -> Dominique -> Jones Walker -> M&A connection is a good one.
3) Increasing number of shares. The comments you make about the issuance of options vs. current maximum sounds correct. But that’s where my question comes in (and it comes in from a place of naivety). If an acquisition is immanent, and happens prior to large chunks of these options becoming vested, then what happens to these options? Do they disappear into the ether (in much the same way super-shares would simply be voided) or do they immediately vest? Depending on what would happen to these unexercised options, an acquisition makes this either (a) totally irrelevant, or (b) wildly important. My assumption would be that these options just disappear in a world of an acquisition meaning that pushing the ceiling higher is not needed, so that makes the question again, why increase the max from 200M to 300M?
You also say on this point that it improves the return on conversions. I get that. But it seems a bit odd that HAL’s determining factor for how much it would cost to acquire STWA is decided by the total number of shares. Using your 1:1 conversion, you peg a STWA buyout at the value of (!) $10B. Why would HAL decide that the company is suddenly worth $15B simply because there are more shares available? I do agree that if STWA were sitting at $25/share on NASDAQ then a 1:1 conversion would be more likely, but how is increasing the total maximum shares get STWA to that point? In your judgment, what’s the link between more shares and NASDAQ? Certainly there could be some. I argued at some point in the recent past the increase in liquidity would make STWA more attractive to institutional investors, but I’d be curious about how you read these tea leaves so that it is evidence of an acquisition.
4) PR darkness. Yea that was weird, wasn’t it? Maybe it was M&A talks behind closed doors. Maybe it was just STWA waiting until they have awesome details about their deal with TRP. It just seems odd for a company to go silent because of a potential M&A, pop up to announce they have a deal, and then announce they’ve “expanded and streamlined” their investor relations to provide more info about the company. That doesn’t sound like a topic a company about to be acquired would be concerned with.
5) Mark Stubbs – Just one thought on this, because I think that this is actually business as usual, and I remember this same argument being made about someone (Zinke? Bigger?) in the past. Stubbs is currently appointed to the board until the next shareholder meeting. At that point, the shareholders will vote for him to be a member of the Board. So his employment is only an appointment until the vote, after which it becomes formal (although, it could technically be voted out, meaning his employment is only guaranteed until then). So while he does flag himself as someone who’s specialized at M&A’s, that’s only one bullet point alongside of investor relations (discussed above), patent litigation (discussed above), and VC fundraising. All of these things are topics of concern for STWA, and only focusing on his specialty on M&A’s overdetermines why he might be at STWA.
So call me Fox Mulder. I want to believe. And the HAL thesis might do the best job at explaining China. I just think that this argument alone doesn't prove that an acquisition will be a topic to vote on in December.
AI
